Which statement best describes how employees contribute to a 401(k) plan?

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Prepare yourself for the GFL Financial Literacy Test. Study with flashcards and multiple choice questions. Each question comes with helpful hints and thorough explanations to aid retention. Get ready for your exam and achieve success!

Multiple Choice

Which statement best describes how employees contribute to a 401(k) plan?

Explanation:
Employee contributions to a 401(k) are made through salary deferral. This means part of each paycheck is set aside into the retirement plan. The amount can come in on a pretax basis (traditional 401(k)), which lowers your current taxable income, or on an after-tax basis (Roth 401(k) if your plan offers it), which means you’ve already paid taxes on those contributions but qualified withdrawals later can be tax-free. This combination is why the statement describing contributions as salary deferral on a post-tax and/or pretax basis is the best fit. It’s not about earning a fixed return—investment returns inside a 401(k) depend on the chosen investments and market performance. Also, while employers may contribute matching funds, employee contributions are not limited to employer contributions only.

Employee contributions to a 401(k) are made through salary deferral. This means part of each paycheck is set aside into the retirement plan. The amount can come in on a pretax basis (traditional 401(k)), which lowers your current taxable income, or on an after-tax basis (Roth 401(k) if your plan offers it), which means you’ve already paid taxes on those contributions but qualified withdrawals later can be tax-free. This combination is why the statement describing contributions as salary deferral on a post-tax and/or pretax basis is the best fit.

It’s not about earning a fixed return—investment returns inside a 401(k) depend on the chosen investments and market performance. Also, while employers may contribute matching funds, employee contributions are not limited to employer contributions only.

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